1. Trade policy plays a vital role in achieving the objectives of rapid economic growth and self-reliance . 2.

It is on the basis of these static and dynamic gains of trade the case for free trade was been built, to achieve high output, income and welfare of its people. 3. When a country specializes on the basis of its comparative cost or production efficiency and export & export accordingly, it enables it to make optimum use & allocation of available (scarce) resources. 4. According to Prof. Habreler, International division of labour and international trade which enable every country to specialize and to export those things which it can produce in exchange for what others can provide at lower cost have been and still are one of the basic factors promoting economic well-being and increasing national income of every participating country. 5. According to D.H.Robertson, Foreign trade as an engine of growth, with great income & production made possible & it leads to increase in economic growth through promotion of exports by which a country earn foreign exchange which it can use for imports of capital equipment & raw materials.

Harberler explains how trade raises the level of income, it also, promotes economic development with following factors. 1. Through foreign exchange trade developing countries can get material resources such as capital equipment, machinery and raw materials which are so essential for industrial growth. 2. The developing countries through trade can import and use superior technology & is embodied in the machines, capital equipment which they import. 3. Foreign trade enables the transmission of technical know what, how, skills, managerial talents to the developing countries. At first, we should concentrate on export promotion in our strategy of development for accelerating economic growth. The second, we should adopt import substitution as a major element of our trade policy such that it does not bleak (depressing) prospectus of raising Indias exports. (i.e.,) when exports could not be increased substantially, we could not pay for imports on a large scale.

Export orientation of trade Policy : (liberalisation aspects)

1. Reduction in customs duties to end anti-export bias. 2. Devaluation of rupee 3. Market determined exchange rate (convertibility of rupee) by RBI. 4. Liberalization of control over exports. 5. Duty-free import of capital goods for use in production for exports. 6. Advance licenses for imports against exports. 7. Exemption from tax and credit subsidies. 8. The duty drawback scheme. 9. Incentive to export of services.

1. No country is self-sufficient in the world today. Hence every country has to import G&S and to pay for imports it has to export G&S to other countries with accordance to comparative cost. 2. In the past, to protect domestic industries, many countries had impose heavy tariffs to restrict imports. But now it was in favour of free trade that promotes economic acceleration of both the countries who practice free trade between them & raise their people standard of living. 3. WTO recently set up to promote free trade among nations of the world and because of which many countries have reduced their tariffs and removed quantitative restrictions (QR) on imports. 4. Indias principle exports are coffee, tea, mate, oil cakes, tabacco, cashew kernels, spices, sugar & molasses, raw cotton, rice, Fish, meat, mica, iron ore, jute, textile, readymade, leather, handicrafts, Gems, jewellery, chemical, machinery, transport & metal manufactures including iron & steel.

Foreign Currency US dollars Pound sterling Euro

Exchange rate 48.0 81.16 58.58

Foreign Currency Canadian dollar Singapore dollar UAE Dhiram

Exchange rate 41.02 27.16 10.77

Janpanese (100 Yen)

34.56

Australian dollar

35.84
as on Oct 2007

1. Balance of payments which describes the transactions of G &S and movements of financial capital between countries under trade activity. The value of these transactions depends on the prices of the currencies of various countries. 2. The market in which currencies of various countries are exchanged, traded, converted is called foreign exchange market. It is a network of communication system and official govt. agencies (RBI) through which the currency of one country can be exchanged for that of another.

1. Floating / flexible and Fixed foreign exchange rate 2. Since exchange rate is a price, its determination can be explained through demand for & supply of currencies. 3. The system of exchange rate in which the value of a currency is allowed to adjust freely of float as determined by demand for and supply of foreign exchange is called Flexible / Float exchange system. 4. If the exchange rate instead being determined by demand for & supply of foreign exchange is fixed by the govt. and called as fixed FER. 5. At a fixed exchange rate, if there is disequilibrium in the balance of payments giving rise to either excess demand or excess supply of foreign exchange rate, the Central bank (RBI) of the country has to buy or sell the required quantities of foreign exchange to eliminate the excess demand or supply.

1. Let us consider the case of rupee and dollar. 2. Appreciation of a currency is the increase in its value in terms of change rate of rupee for dollar. Thus, if the value of a rupee in terms of US dollar increases from Rs. 45.50 to Rs. 44 to a dollar, thus Indian rupee is said to appreciate. & it indicates strength of purchasing power of Rs. & dollar would depreciate. 3. Depreciation of a currency is the decrease in its value of a rupee in terms of US dollar decreases from Rs. 44 to Rs. 45.58 to a dollar, thus Indian rupee is said to depreciate & it indicates weakness of purchasing power of Rs. & dollar would appreciate. 4. Under flexible ERS, the exchange value of currency frequently appreciates or depreciates depending upon the demand for & supply of a currency. 5. Under fixed ERS has to buy or sell foreign exchange in order to maintain the rate at the controlled level. 6. One-time lowering of value of its currency in terms of Floating ERS occasionally by a country is called devaluation. With a floating ERS if a country raises the value of its currency in terms of foreign currency, it is called revaluation.

1. Let us consider two countries, India & US, the exchange rate of their currencies (Rs. & $) is to be determined. Thus we explain below how the value of $ in terms of Rs. (which will conversely indicate the value of a Rs. In terms of $) is determined. 2. At present in both US & India, there is a floating / flexible exchange regime. Therefore, the value of currency of each country in terms of the other depends upon the demand for and supply of their currencies. 3. The foreign exchange market is the market in which the currencies are being traded. 4. The currency which is traded most is the highly demanded currency by the world market and most powerful currency too.